Question

In tender price, the amount of factory overhead is generally based on:

a. Material cost
b. Prime cost
c. Wages
d. Works cost

Answer 1

Factory overhead in tender price calculations is based on the works cost, which is inclusive of direct costs like materials and wages, as well as indirect production expenses. Wages rise can influence the choice of production technology, showing their impact on the overall works cost.

Step-by-step explanation:

In tender price calculations, the amount of factory overhead is typically based on the 'works cost'. The works cost includes not only the direct expenses like materials and wages but also takes into account the indirect costs associated with the production process. For instance, if the wages rise significantly, as shown in our examples, the choice of production technology may change to adapt to these new costs.

Factory overhead traditionally includes all the costs that are incurred during the production process, except for direct materials and direct labor. This includes expenses like utilities, depreciation of machinery, and rent for factory facilities. When calculating the tender price, accurate costing of factory overheads is critical to ensure the bid is competitive yet profitable.